Income Tax Accounting
Final Exam Questions
Course Introduction
Income Tax Accounting provides students with an understanding of the principles, rules, and procedures involved in the preparation and analysis of income tax returns for individuals and businesses. The course explores the federal tax system, including gross income determination, deductions, credits, and tax liability computation. Emphasis is placed on the interpretation of the Internal Revenue Code, tax planning strategies, and ethical considerations. Through case studies and practical exercises, students gain hands-on experience in preparing tax documents, researching tax issues, and applying tax law to real-world situations relevant to both personal and business contexts.
Recommended Textbook
South Western Federal Taxation 2014 Individual Income Taxes 37th Edition by William Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Virtually all state income tax returns contain checkoff boxes for donations to various causes.On what grounds has this procedure been criticized?
Answer: In many cases the procedure is overused (i.e.,a multiplicity of boxes).This overuse adds complexity to the return.Also,in most cases the donation is being drawn from any income tax refund that might be due.Thus,taxpayers may not fully appreciate that they are paying for such checkoffs.
Q2) Tracy has just been audited and the IRS agent has issued an RAR that assesses a large deficiency.Since Tracy disagrees with the result,her next step is to go to court.Do you agree?
Answer: Tracy might save herself time and expense by going to the Appeals Division of the IRS.Here,the IRS has the authority to negotiate a settlement based on the "hazards of litigation" (i.e.,the probabilities of winning or losing).If a settlement is reached,resort to the courts is avoided.
Q3) The pay-as-you-go feature of the Federal income tax on individuals conforms to Adam Smith's canon of certainty.
A)True
B)False
Answer: False
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Chapter 2: Working With the Tax Law
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Q1) A taxpayer must pay any tax deficiency assessed by the IRS and sue for a refund to bring suit in the U.S.Court of Federal Claims.
A)True
B)False
Answer: True
Q2) Regulations are arranged in the same sequence as the Internal Revenue Code.
A)True
B)False
Answer: True
Q3) The granting of a Writ of Certiorari indicates that at least four members of the Supreme Court believe that an issue is of sufficient importance to be heard by the full court.
A)True
B)False
Answer: True
Q4) A taxpayer can obtain a jury trial in the U.S.Court of Federal Claims.
A)True
B)False Answer: False
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Sample Questions
Q1) During the year,Kim sold the following assets: business auto for a $1,000 loss,stock investment for a $1,000 loss,and pleasure yacht for a $1,000 loss.Presuming adequate income,how much of these losses may Kim claim?
A) $0.
B) $1,000.
C) $2,000.
D) $3,000.
E) None of the above.
Answer: C
Q2) In determining the filing requirement based on gross income received,both additional standard deductions (i.e.,age and blindness)are taken into account.
A)True
B)False
Answer: False
Q3) Under what circumstances,if any,may an ex-spouse be claimed as a dependent?
Answer: As an ex-spouse does not meet the relationship test,he or she must be a member of the taxpayer's household.The association cannot be in violation of local law and the year involved cannot be the year of the divorce.
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Darryl,a cash basis taxpayer,gave 1,000 shares of Copper Company common stock to his daughter on September 29,2012.Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years.Just as Darryl had expected,Copper Company declared a $2.00 per share dividend on September 30th,payable on October 15th,to stockholders of record as of October 10th.The daughter received the $2,000 dividend on October 18,2012.
A) Darryl must recognize the $2,000 dividend as his income because he knew the dividend would be paid.
B) Darryl must recognize the income of $2,000 because he constructively received the $2,000.
C) Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
D) The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.
E) None of the above.
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Chapter 5: Gross Income: Exclusions
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Q1) Juan,was considering purchasing an interest in a tax-exempt bond fund for $100,000,when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is 35%,and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative,Juan can purchase a state bond (a "double-exempt bond")yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?
Q2) Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School.She may exclude the $5,000 scholarship she received although the scholarship is to attend a private high school.
A)True
B)False
Q3) A debtor undergoing a Chapter 11 reorganization under the bankruptcy laws who receives a discharge of his or her liabilities has realized income but can exclude the debt reduction from gross income.
A)True
B)False
Q4) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Paula is the sole shareholder of Violet,Inc.For 2012,she receives from Violet a salary of $300,000 and dividends of $100,000.Violet's taxable income for 2012 is $500,000.On audit,the IRS treats $100,000 of Paula's salary as unreasonable.Which of the following statements is correct?
A) Paula's gross income will increase by $100,000 as a result of the IRS adjustment.
B) Violet's taxable income will not be affected by the IRS adjustment.
C) Paula's gross income will decrease by $100,000 as a result of the IRS adjustment.
D) Violet's taxable income will increase by $100,000 as a result of the IRS adjustment.
E) None of the above is correct.
Q2) What are the relevant factors to be considered in determining whether an activity is profit-seeking or a hobby?
Q3) How can an individual's consultation with a lawyer be classified as a deduction for AGI in some cases and a deduction from AGI in other instances?
Q4) Briefly discuss the two tests that an accrual basis taxpayer must apply before an expense can be deducted.
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Discuss the treatment,including the carryback and carryforward periods,of casualty losses incurred with personal use property.
Q2) Identify the factors that should be considered in determining whether a transaction is a bona fide loan or a gift.
Q3) A cash basis taxpayer can deduct the cost of a product sold even though the purchaser of the product ultimately does not pay the purchase price.
A)True
B)False
Q4) Al,who is single,has a gain of $40,000 on the sale of §1244 stock (small business stock)and a loss of $80,000 on the sale of § 1244 stock.As a result,Al has a $40,000 ordinary loss.
A)True
B)False
Q5) If an election is made to defer deduction of research expenditures,the amortization period is based on the expected life of the research project if less than 60 months.
A)True
B)False
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) If more than 40% of the value of property,other than real property,is placed in service during the last quarter,all of the property will be allowed 1.5 months of cost recovery.
A)True
B)False
Q2) In a farming business,if the uniform capitalization rules are not used,cost is recovered using the ADS straight-line method.
A)True
B)False
Q3) Jim acquires a new seven-year class asset on September 20,2012,for $80,000.He placed the asset in service on October 5,2012.He does not elect to expense any of the asset under § 179 or elect straight-line,cost recovery.He takes additional first-year depreciation.He sells the asset on August 25,2013.This is the only asset he acquires in 2012.Determine Jim's cost recovery in 2012 and 2013.
Q4) The amortization period in 2012 for $4,000 of startup expenses if no election is made is 180 months.
A)True
B)False
Q5) Discuss the reason for the inclusion amount with respect to leased automobiles.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Marvin lives with his family in Alabama.He has two jobs: one in Alabama and one in North Carolina.Marvin's tax home is where he lives (Alabama).
A)True
B)False
Q2) A taxpayer who maintains an office in the home to conduct his only business will not have nondeductible commuting expense.
A)True
B)False
Q3) Which of the following expenses,if any,qualify as deductible?
A) Contributions to a Coverdell Education Savings Account (CESA).
B) Contributions to a qualified tuition program (§ 529 plan).
C) Job hunting expense of FBI agent who applies for the job of city manager of Beaumont (TX).
D) Contribution to a traditional IRA.
E) None of the above.
Q4) Qualifying job search expenses are deductible even if the taxpayer does not change jobs.
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Which of the following items would be an itemized deduction on Schedule A of Form 1040 subject to the 2%-of-AGI floor?
A) Professional dues to membership organizations.
B) Work uniforms that cannot be used for normal wear.
C) Job-hunting costs.
D) Hobby losses up to the amount of hobby income.
E) All of the above.
Q2) In April 2012,Bertie,a calendar year cash basis taxpayer,had to pay the state of Michigan additional income tax for 2011.Even though it relates to 2011,for Federal income tax purposes the payment qualifies as a tax deduction for tax year 2012.
A)True
B)False
Q3) Grace's sole source of income is from a restaurant that she owns and operates as a proprietorship.Any state income tax Grace pays on the business net income must be deducted as a business expense rather than as an itemized deduction.
A)True
B)False
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Chapter 11: Investor Losses
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Sample Questions
Q1) Eric makes an installment sale of a passive activity having suspended losses of $40,000.He collects 25% of the sales price in the current year,and will collect 25% in each of the next three years.Eric can deduct $10,000 of the passive loss this year.
A)True
B)False
Q2) Stan,a computer lab manager,earns a salary of $80,000 and receives $25,000 in dividends and interest during the year.In addition,he incurs a loss of $40,000 from an investment in a non-real estate passive activity.His at-risk amount in the activity at the beginning of the year is $55,000.What is Stan's adjusted gross income for this year?
A) $65,000.
B) $70,000.
C) $105,000.
D) None of the above.
Q3) Describe the types of activities and taxpayers that are subject to the at-risk rules.
Q4) What special passive loss treatment is available to real estate activities?
Q5) Identify how the passive loss rules broadly classify various types of income and losses.Provide examples of each category.
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Chapter 12: Alternative Minimum Tax
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Q1) Certain adjustments apply in calculating the corporate AMT that do not apply in calculating the noncorporate AMT and certain adjustments apply in calculating the noncorporate AMT that do not apply in calculating the corporate AMT.
A)True
B)False
Q2) If the AMT base is greater than $175,000,the AMT rate for an individual taxpayer is the same as the AMT rate for a C corporation.
A)True
B)False
Q3) How can interest on a private activity bond issued in 2008 result in both an AMT adjustment that decreases AMTI and an AMT preference that increases AMTI?
Q4) The AMT exemption for a C corporation is $40,000 reduced by 35% of the amount by which AMTI exceeds $150,000.
A)True
B)False
Q5) Under what circumstances are corporations exempt from the AMT?
Q6) Discuss the tax year in which an AMT adjustment is first required for an ISO.
Q7) Will all AMT adjustments reverse? That is,do they relate to timing differences?
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Chapter 13: Tax Credits and Payment Procedures
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Q1) Nonrefundable credits are those that reduce the taxpayer's tax liability but are not paid when the amount of the credit (or credits)exceeds the taxpayer's tax liability.
A)True
B)False
Q2) The disabled access credit was enacted to encourage small businesses to make their businesses more accessible to disabled individuals.
A)True
B)False
Q3) The ceiling amounts and percentages for 2012 for the two portions of the self-employment tax are: Social Security portion Medicare portion
A) $110,100; 13.3% Unlimited; 2.9%
B) $110,100; 12.4% Unlimited; 2.9%
C) $110,100; 10.4% Unlimited; 2.9%
D) $110,100; 10.4% Unlimited; 13.3%
E) None of the above.
Q4) How does the FICA tax compare to the self-employment tax? How are these two taxes similar and how do they differ?
Q5) Describe the withholding requirements applicable to employers.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) The basis of property acquired in a wash sale is its cost plus the loss recognized on the wash sale.
A)True
B)False
Q2) How is the donee's basis calculated for the gift of appreciated property for a gift made before 1977? Assume the donor pays gift tax.
Q3) Define fair market value as it relates to property transactions.
Q4) The basis of property acquired in a bargain purchase is the cost of the asset.The bargain amount (fair market value - cost)is recognized when the asset is sold.
A)True
B)False
Q5) The taxpayer owns stock with an adjusted basis of $15,000 and a fair market value of $8,000.If the stock or cash is going to be given to her niece,it is preferable for the taxpayer to sell the stock and give the $8,000 of cash to her niece.The same preference would exist if the recipient were a qualified charitable organization.
A)True
B)False
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Ross lives in a house he received as a gift from his father.His father had lived in the house for 12 years.The adjusted basis of the house to his father was $160,000 and the fair market value at the time of the gift was $140,000.Ross sells this residence after living in it for 18 months for $150,000 and purchases a new home for $125,000.He incurs selling expenses of $7,000.What is Ross' recognized gain or loss and basis for the new residence?
A) ($17,000); $125,000.
B) ($17,000); $142,000.
C) $3,000; $125,000.
D) $3,000; $128,000.
E) None of the above.
Q2) Define an involuntary conversion.
Q3) The nonrecognition of gains and losses under § 1031 is mandatory for gains and elective for losses.
A)True
B)False
Q4) What kinds of property do not qualify under the like-kind provisions?
Q5) Define qualified small business stock under § 1045.
Q6) Distinguish between a direct involuntary conversion and an indirect involuntary conversion.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Martha is single with one dependent and files as head of household.She had 2012 taxable income of $45,000 which included $16,000 of 0%/15% net long-term capital gain.What is her tax on taxable income using the alternative tax on net long-term capital gain method?
Q2) Hilda lent $2,000 to a close personal friend to help the friend avoid overdrawing the friend's checking account.The friend was supposed to repay the $2,000 within a month.Instead,the friend declared personal bankruptcy and Hilda will never recover any of the $2,000.What are the tax implications of these events for Hilda?
Q3) Willie is the owner of vacant land that he purchased in 2008 for $1,400,000 and held for investment.On January 22,2011,he was paid $145,000 for a thirteen-month option on the land by Susan.Susan could buy the land for an additional $1,200,000 by exercising the option.Susan had hoped to build a luxury home on the land,but was unable to get approval to build a big enough home to satisfy her needs.Consequently,Susan did not exercise her option and the option expired on February 22,2012.(1)What is Willie's basis,gain or loss,and type of gain or loss from these events? (2)What is Susan's basis,gain or loss,and type of gain or loss from these events?
Q4) What characteristics must the seller of a patent have in order to be classified as a holder?
Page 18
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Section 1231 property generally does not include accounts receivables arising in the ordinary course of business.
A)True
B)False
Q2) Lynne owns depreciable residential rental real estate which has accumulated depreciation (all from straight-line)of $65,000.If Lynne sold the property,she would have a $53,000 gain.The initial characterization of the gain would be:
A) Section 1245 gain.
B) Section 1231 gain.
C) Section 1250 gain.
D) Section 1239 gain.
E) None of the above.
Q3) Residential real estate was purchased in 2009 for $345,000,held as rental property,and depreciated straight-line.Assume the land cost was $45,000 and the building cost was $300,000.Depreciation totaled $34,089.The building and land were sold on June 10,2012,for $683,000 total.What is the tax status of the property,the nature of the gain from the disposition,and is any of it § 1250 depreciation recapture gain or unrecaptured § 1250 gain?
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Chapter 18: Accounting Periods and Methods
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Q1) A C corporation in the manufacturing business must use a calendar year as its tax year unless the corporation has a business reason for using a tax year that is not a calendar year.
A)True
B)False
Q2) Terry,Inc.,makes gasoline storage tanks.All production is done under contract.The company makes three basic models,but each model must be adapted to customer specifications for the location of outlets,insulation,and paint.It takes from three to six months to complete a tank.How should Terry account for the income for the business?
Q3) The installment method applies where a payment will be received after the tax year of the sale:
A) By an investor who sold real estate at a gain.
B) By an investor who sold real estate at a loss.
C) By an appliance dealer who sold inventory at a gain.
D) By an investor who sold IBM Corporation common stock at a gain.
E) None of the above.
Q4) What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?
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Chapter 19: Deferred Compensation
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Q1) Restricted stock cannot be sold or treated as owned by an employee until it vests.
A)True
B)False
Q2) Which is not considered to be a fringe benefit?
A) Tax deferred annuities.
B) Group legal service
C) Group term life insurance.
D) Qualified transportation benefit.
E) All of the above are fringe benefits.
Q3) The special § 83(b)election (i.e.,where income is taxed in the year of the grant)with respect to a restricted stock plan may be advantageous in which of the following situations in 2012?
A) The employer is an unstable company.
B) The bargain element is relatively small.
C) A minimum amount of appreciation is expected in the future.
D) The restriction probably will not be satisfied.
E) None of the above.
Q4) What is a defined contribution plan?
Q5) What is a profit sharing plan?
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Chapter 20: Corporations and Partnerships
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Q1) Which of the following statements,if any,is characteristic of constructive dividends?
A) They must be available to the shareholders on a pro rata basis.
B) They can occur even if the corporation has no earnings and profits.
C) They must be formally declared and paid (i.e., declaration date, record date, payment date).
D) They are not deductible by the corporation.
E) None of the above.
Q2) Four unrelated,calendar year corporations are formed on January 1,2012,and have the following qualified organizational expenditures: $4,000 for Maize Corporation; $15,000 for Orange Corporation; $53,000 for Pearl Corporation; and $56,000 for Chestnut Corporation.What is the maximum deduction each can claim for 2012?
Q3) If the shareholders of a calendar year C corporation elect S status on Thursday,March 15,2012,the election is effective for all of 2012.
A)True
B)False
Q4) Currently all C corporations must file a Schedule M-3 with Form 1120.
A)True
B)False
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